‘SEVERAL OLD-STYLE CONGLOMERATES WILL BE OUT OF THE NIFTY'

The next decade will see financialisation of savings and formalisation of the economy, retail and distribution

- Saurabh Mukherjea

The Nifty typically churns by 40 percent over a 10-year period. This implies that 20 of the current Nifty constituents will find themselves ejected.

If you or I can second-guess some of these exits/ entrants, we will improve our chances of generating returns significantly higher than the long-term returns of investing in the Nifty.

Going by the historical trend since the Nifty was created, almost all the entrants into the Nifty over the next decade will come from 100 stocks currently just underneath the Nifty. In order to assess which of these 100 companies will find themselves in the benchmark a decade hence, it is worth first trying to assess how the Indian economy will change over the coming decade.

I see three noteworthy changes that will take place in India over the next decade: (1) Formalisation of the economy and concentration of profit share: India is already an economy with extraordinary levels of profit share concentration in key sectors, with one or two companies accounting for 80 percent of the profits generated in their sectors. For example, in paints (Asian Paints, Berger Paints), biscuits (Britannia, Parle), hair oil (Marico, Bajaj Corp), infant milk powder (Nestle), adhesives (Pidilite) and small cars (Maruti, Hyundai). Now this trend looks likely to spread to more fragmented sectors where, hitherto, the unorganised players had greater profit share.

Leaving aside financial services and retail, several other sectors will face the impact of the networking of the economy (cheap broadband, low-cost domestic flights, extensive road network, availability of banking services etc.), and GST and the crackdown on black money, which is likely to compress profit share into one or two hands.